A:

Net sales are the amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The company reports its net sales figure on its balance sheet. Some key conditions may explain the decline in net sales of a company despite increasing revenues.

Company Sales Returns Policy

The sales return policy of a company can account for declining net sales, even with increasing revenues. Increases in revenues may be temporary, such as those brought about by aggressive marketing tactics. As such, customers such as retailers may order in bulk during certain months when distributors aggressively push sales. Distributors may aggressively push sales to qualify for certain incentives or to meet their sales quota for the month.

In turn, if the parent company has a very lax sales returns policy, retailers can return unsold items to distributors and either exchange them for other items or offset them against the retailers' accounts payable to the distributor. In turn, the distributor returns these items to the parent company, which causes a decline in the net sales of the company over the period.

This was the experience of a Philippine company specializing in perishable industrial chemicals. The company executives were shocked with sudden dips in net sales figures for the year, which is often far from their revised sales forecasts. Upon investigation, these dips came from returns of their products by distributors. The bulk of these returns occurred during the final weeks of December, which is the close of the company's fiscal year. Many of these returned items had to be written off, since they were nearing expiration or were already expired. Thus, the company revenues for the year were increasing, but its net sales were decreasing. The company revised its sales return policy, and it experienced a significant increase in net income for the subsequent year.

Aggressive Discount Policies

In an effort to increase revenues, companies might embark on aggressive discount policies, such as increasing the cash discount for prompt payments. If revenues do not improve as much, the corresponding increase in sales discount might eat the marginal increase in revenue. This would cause an increase in sales revenue but a dip in net sales reported.

Cash discounts are different from trade discounts, since trade discounts are not recognized as part of sales revenue. Even with an aggressive trade discount policy (such as a 20% reduction in catalogue price), the catalogue price itself would not form part of gross revenue. However, the price prior to the application of the cash discount is part of gross revenue.

Revenue generation is a very important aspect of every business as revenue drives growth. However, liberal returns policies or aggressive discounts may decrease net sales and cause unexpected losses. These matters are the subject of internal management discussions, and it is important to be wary of the effects of these promotions to ensure that sustainable growth is achieved.

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